Financial capability: what New Zealanders could do with from their governments

I’ve written previously, and skeptically, about the financial capability strategy the government released last year. It is something of a wonder that civilisations have reached their current prosperity and sophistication without the aid of governments and their officials strategizing and pontificating about what we, citizens, “need” to know about money. “Building the financial capability of New Zealanders is”, we are told, “a priority for the government”. But what business is it of theirs? And each time I read that line, I can’t help thinking that it would be better, and much more legitimate, if it were reversed: building financial capability of governments (and its agencies and officials) should be a priority for New Zealanders.

Last week, the bureaucrats were at it again. The Financial Markets Authority published a so-called White Paper, with a Foreword written by the Chief Executive (so this is no mere background research paper, simply reporting the views of the authors), headed Using behavioural insights to improve financial capability. The paper seems to be laying down markers for future regulatory initiatives. It is probably better that the paper is out for scrutiny, rather than being held closely among the various government agencies. But as I read it, the words of Jesus kept coming to mind

You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye.

The report is full of enthusiasm for understanding better the way in which consumers make decisions – as if marketers and advertising agencies have not been doing that for decades. It does so by drawing on a variety of insights from the behavioural financial literature, but in a fairly highly simplified (and one-sided) manner – the entire report has 12 pages of text, with plenty of white space. The behavioural financial literature does offer some fascinating perspectives on how people make decisions, but not often on why they have evolved to make those decisions that way. And it does offer useful insights for marketers, and even for government officials trying to improve compliance rates (getting taxes, fines or fees paid on time). Framing clearly matters.

But the leap from better understanding how consumers and citizens makes decisions to recommendations for policy interventions is not typically based on very much at all. Assertions such as the claim by FMA CEO Rob Everett that “it is no one’s interest….for any investment decision to be made on the basis of bias or behavioural idiosyncrasy” seems to be based on nothing at all. Or to be charitable, perhaps it is based on some benchmark of conforming human behaviour to some simple, particularly sterile but tractable, economic model, rather than recognizing that our biases and idiosyncracies (as he calls them) are often intrinsic to our humanity. The authors seem to have a particular distaste for any involvement of emotion in decision-making.

It is a short paper, and so in a sense it is all too easy to pick holes. But these bureaucrats appear to want to shape policy thinking, and they made the choice about what to put out for discussion. So when they say “we overspend on credit cards and pay down debt less than we should”, we might reasonably ask not whether they can cite a single paper that shows that under certain experimental conditions this result might be able to be produced, but rather “where is the systematic evidence of a problem?” Advances outstanding on credit cards at present are less than 3 per cent of GDP – any credit card debt ever is too much for me personally, but across the economy it is hard to find evidence of a problem spiraling out of control.

And, of course, much of the discussion of these issues has a subtext of unease about the choices people make for retirement provision. But again, where is the evidence of a problem justifying policy intervention? The FMA paper asserts that “most people struggle to plan for future needs”, But, as is widely recognized, New Zealand has one of the very lowest rates of poverty among elderly people of any advanced country, and older people seem to score their own life-satisfaction quite highly. Is there any public policy interest at all in particular consumption outcomes for middle and upper income people in their later years? Subject to the basics being met – which they clearly have been in New Zealand – I can’t see one.

Thus, when the paper cites interesting experiments which can lead to people saving more, it never stops to ask “by what measure, against what benchmark, is higher savings a desirable outcome for these population groups as a whole”. There is simply no evidence of a “savings problem” in New Zealand, either at a micro level or a macro one. Kiwisaver’s auto-enrolment (with opt-out) feature is described as “demonstrating the success of this approach”, but against what benchmark? To what end?

And when they report that research “shows people who have a plan are more likely to feel prepared for their retirement. The effect was consistent across all income levels”, are they telling us anything more than that some people like to have all the i’s dotted and t’s crossed, and they feel better if they have a “plan”. It tells us nothing whatever about the ability of people to get through life.

In devising regulatory interventions, when they are well-warranted, it is important for regulators to understand how humans are likely to behave and respond. And if those insights help get fines or taxes paid more promptly, then I’m right behind the use of them. But when governments and their officials think they can do better than people, and market institutions, somehow correcting for the “flaw” in human nature, which have evolved over tens of thousands of years, we should be much much more skeptical.

Among the many reasons for such skepticism is the unspoken point that government officials and ministers, even those in the FMA, are human beings too, subject to all the same characteristics of human nature. There is no class of detached super beings able to wisely choreograph the rest of us (directly or indirectly). And frankly it would be frightening, not reassuring, if there were,

But none of the weaknesses of regulators or governments appear in this White Paper at all. There is a passing acknowledgement on the final page that “not every intervention is good” (really????) but no sense at all of the weaknesess, or biases to which regulators and officials and politicians are prone. A good first question for every official or politician proposing new controls is something along the lines of “and what biases etc are you subject to, and how do the institutions protect citizens from (unwitting) bad outcomes from that actions of people like you – including if the regime was run by your politicial opponents or the officials from the agency you have least time (and respect) for.”

As I noted earlier, a much stronger case could be made that citizens need a stronger financial capability among our governments and government agencies, and protections from all the “biases” or behavioural inclinations to which governments are prone. Governments get countries into expensive wars. Government choices are most often at the root of financial crises. Governments mess up countries’ growth (and future consumption) prospects. Governments badly distort housing markets. Governments build expensive white elephants (whether sports stadiums, Think Big projects, or airport runway extensions). Governments regulate on the whims of key individuals, with little or no regard for the consequences. Governments put in place new programmes with little ability to assess longer-term consequences for individuals or society (eg welfare systems). Governments repeatedly eschew rigorous cost-benefit analysis. And so on. Not all governments, not everywhere – and almost always with good intentions – but all too often.

This isn’t an anti-government tirade. Societies need governments. And they need governments to do well what only governments can effectively do (police, defence, administration of justice and so on). But the fact that we need governments does not mean that we safely can, or should, trust governments and their agents and agencies. Before they try to sort out human nature, we might more aptly aim to put in place much stronger checks and balances to restrain the flaws and biases to which governments seem intrinsically prone.

Last week, US economist Bryan Caplan on Econlog drew attention to a fascinating looking (quite long) new paper from Texas A&M University School of Law, “Behavioral Public Choice and the Law”. I haven’t read it all yet, but I intend to. The table of contents alone looks promising.

When we’ve seen the FMA – and perhaps more importantly policy agencies like Treasury and MBIE – seriously grapple with this sort of literature, I might be more interested in listening to their proposals for how they think government interventions might help improve citizens’ own decision-making.

This looked as though it should be a good topic for the New Zealand Initiative to pick up, following on from their new report on other paternalistic interventions (sugar taxes and the like). But then I noticed that the chairman of the FMA is also on the Board of the New Zealand Initiative.

Behavioral economics combines economics and psychology to produce a body of evidence that individual choice behavior departs from that predicted by neoclassical economics in a number of decision-making situations. Emerging close on the heels of behavioral economics over the past thirty years has been the “behavioral law and economics” movement and its philosophical foundation — so-called “libertarian paternalism.” Even the least paternalistic version of behavioral law and economics makes two central claims about government regulation of seemingly irrational behavior: (1) the behavioral regulatory approach, by manipulating the way in which choices are framed for consumers, will increase welfare as measured by each individual’s own preferences and (2) a central planner can and will implement the behavioral law and economics policy program in a manner that respects liberty and does not limit the choices available to individuals. This Article draws attention to the second and less scrutinized of the behaviorists’ claims, viz., that behavioral law and economics poses no significant threat to liberty and individual autonomy. The behaviorists’ libertarian claims fail on their own terms. So long as behavioral law and economics continues to ignore the value to economic welfare and individual liberty of leaving individuals the freedom to choose and hence to err in making important decisions, “libertarian paternalism” will not only fail to fulfill its promise of increasing welfare while doing no harm to liberty, it will pose a significant risk of reducing both.

And you are right.
When did government or its minions ever actually get economics right?
Start (as i have said before), with the Reserve Bank Act.
Forget about the salad dressings and address the real issue.
Making NZ wealthy.

If I recall correctly Kiwisaver was created by Cullen in response to some dubious research indicating that NZ savings rates were falling at a time of record Govt surpluses… And suddenly… there it was…

The whole cluster**** that is the financial advisers regulations was created out of thin air without any research being done on identifying how widespread problems were. No research at all…something, it would seem, had to be done by right thinking people. The result of this new set of obligations was a large number of financial advisers left the industry (there were problems to be sure, but was the problem big or small? we don’t know) and the FMA was left with far fewer financial advisers than it expected…

So having buggered that up they now decide that to use nudge policies and lifestyle regulations to try and make people do something that they don’t really want to do. And it will be all our fault too! I bet there are folks at the FMA that complain that regulating would be so much easier if there were no people involved…